Mortgage Banking Update - August 3, 2018
Washington Amends Mortgage Servicing Regulations
The Washington Department of Financial Institutions (DFI) amended its regulations under the Consumer Loan Act, effective September 1, 2018. Changes are made to a variety of provisions, including licensing coverage and various substantive requirements. The amendments can be found here.
The definition for "service" or "servicing a loan" is amended. In addition to the existing definitions of licensable servicing activity, the regulation further defines certain "regulated persons," which include:
(1) A "servicer," which covers "[p]ersons directly engaged in servicing.
(2) A "master servicer," which includes [p]ersons responsible for ongoing servicing administration either by directly servicing or through servicing agreements with licensed or exempt subservicers." We note that the definition also permits the DFI to issue a license waiver to a master servicer that services or administers the servicing of fewer than 25 loans.
(3) A "subservicer," which covers "[p]ersons directly servicing pursuant to a servicing agreement with a master servicer.
Two exemptions from the licensing requirement are added, for an "investor" and "note buyer." Those terms are defined as follows:
(1) An "investor," defined as "[p]ersons holding securities or other types of instruments backed by pools of residential mortgage loans." The definition clarifies that "investors" are not servicers, master servicers, or subservicers.
(2) "Note buyers," which are defined as "[p]ersons who purchase mortgage loans without servicing rights and who are not servicers, master servicers, or subservicers."
The definition of "individual servicing a mortgage loan" is also revised. The definition now generally covers the collection of payments, instead of only covering the collection of payments when the borrower is in default or in reasonably foreseeable likelihood of default.
Various other provisions are also amended, including new reporting requirements, recordkeeping requirements, and substantive servicing requirements. Licensees must now report to the DFI if there is a change to the company’s recordkeeping location, if the company’s capital falls below those required by a GSE, or termination of an approval by a GSE.
Notably, the required content of records for mortgage servicers has been amended. Servicers must now maintain recorded telephone conversations with consumers for three years after the date of the call, or longer if required by other applicable law. Servicers also must maintain all notices from GSEs, and servicing agreements, as part of their loan servicing record. Regarding electronic records, the regulations now specify that if a licensee’s records are maintained on a cloud service, that the servers underlying that service must be located in the United States or its territories.
The regulations also are amended to reorganize and refine certain substantive mortgage servicing requirements. Certain minor changes appear to be intended for conformity with federal requirements. For example, the existing provisions for responding to a borrower’s request for information is moved to a new section, and is largely the same content. However, the timeframe for responding to a general written information request from a borrower is changed from 15 to 30 business days. While this is a helpful change, and reduces unnecessary variation, the regulation retains some inconsistent requirements. Regarding the information request provisions, separate from the general request for information requirements discussed above, the regulation retains a provision which states that "a borrower may request more detailed information from the servicer, and the servicer must provide the information within 15 business days of receipt of a written request from the borrower." It is not clear what distinguishes these two types of information requests and the differing applicable timeframes. It is our hope that states will further reduce such unnecessary variation from the substantive mortgage servicing requirements promulgated by the CFPB.
OCC to Accept Applications from Fintech Companies Seeking National Bank Charters
The Office of the Comptroller of the Currency’s (OCC) announcement this week that it will begin accepting applications for special purpose national bank (SPNB) charters from financial technology (Fintech) companies represents a major development that provides Fintech companies with the opportunity to take advantage of the benefits of federal preemption available to full-service national banks. Most significantly, the OCC’s decision means that obtaining an SPNB charter is now an option for Fintech companies that would be disqualified from obtaining a full-service national bank charter due to their own non-financial activities or those of an affiliate.
On August 28, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr will conduct a webinar, "The OCC's Special Purpose National Bank Charter: What Fintech Companies Need to Know." A link to register is available here.
As set forth in a new Policy Statement, it is now the OCC’s policy to consider applications for SPNB charters from Fintech companies "that are engaged in the business of banking but do not take deposits." The statement confirms the OCC’s authority under the National Bank Act (NBA) to grant the charters and generally describes the chartering standards the OCC will apply and its supervisory expectations for Fintech companies that receive an SPNB charter. The application and decision process is described more fully in a supplement to the OCC's existing Licensing Manual, "Considering Charter Applications from Financial Technology Companies." The supplement describes an SPNB as a bank "that would engage in one or more of the core banking activities of paying checks or lending money, but would not be insured by the Federal Deposit Insurance Corporation (FDIC)."
The supplement discusses:
- the application process, including prefiling communications with the OCC’s Office of Innovation and Licensing Department;
- key factors considered by the OCC in reviewing an application, including the qualifications and experience of organizers, managers, and directors, as well as the applicants’ business plan, and the SPNB’s capital and liquidity, commitment to financial inclusion, and contingency planning;
- the OCC’s chartering decision, including conditions of approval; and
- OCC supervision of approved SPNBs.
Below are some items of particular note in the supplement:
- An SPNB’s organizers will be expected to propose a minimum level of capital the bank will meet or exceed at all times. If preliminary approval of an SPNB charter is granted, the approval will include a condition specifying the minimum level of capital that the bank must meet or exceed at all times. Organizers will also be expected to describe how the SPNB can be funded and maintain sufficient liquidity under stressed conditions.
- Because it is uninsured, an SPNB, as a condition of charter approval, must have a contingency plan that includes options to sell itself, wind down, or merge with a nonbank affiliate, if necessary.
- Assessments imposed on an SPNB as a condition of charter approval will be modified from those charged to full-service national banks based on factors tailored to the SPNB’s business model.
- In considering applications, the OCC will coordinate with other regulators to facilitate consideration of any applications or approvals required by those regulators.
- A pending enforcement action involving a significant supervisory matter may be grounds for denial of an application. If an application is approved for a company that has an obligation to remediate or pay penalties for violations cited by another regulator, the OCC will ensure that the obligation is carried forward and enforced through conditions imposed on a charter approval.
A SPNB charter would allow Fintech companies that engage in lending activities or payment services to enjoy the benefits of federal preemption afforded to full-service national banks under the NBA. (In the supplement, the OCC states that "facilitating payments electronically may be considered the modern equivalent of paying checks.") An SPNB charter would allow such Fintech companies to avoid burdensome state licensing requirements for lending activities and money transmission. They would also be entitled to the NBA’s preemption of state consumer financial laws that "prevent or substantially interfere with the national bank’s exercise of its powers."
For Fintech companies engaged in lending activities, an SPNB’s entitlement to federal preemption would eliminate the need for a bank partner and the potential for "true lender," Madden, and other legal challenges arising from such relationships. In particular, an SPNB would be entitled to the NBA’s preemption of state usury laws so that it could export the maximum interest rate allowed in the state where the bank is located and make loans in other states without regard to their usury laws.
Under the Bank Holding Company Act (BHCA), a "bank" is defined as an institution that is an "insured bank" as defined in the Federal Deposit Insurance Act (FDIA) or that both receives "demand deposits or deposits that the depositor may withdraw by check or similar means for payment to third parties or others" and makes "commercial loans." The parent company of an SPNB that does not take deposits, but only makes loans, will not be deemed a bank holding company under the BHCA or be subject to Federal Reserve oversight. As a result, the activities in which the parent company could engage would not be restricted by the BHCA. It is uncertain, however, whether the Federal Reserve would assert jurisdiction over, and thereby seek to restrict the activities of, the parent company of an SPNB that offers payments services that are akin to the payment of checks but does not have deposit insurance or take deposits.
SPNBs also would not be subject to the FDIA’s provisions applicable to "insured depository institutions" because they would not be required to have deposit insurance. However, in the Policy Statement, the OCC made clear that it would not approve charter applications from Fintech companies that include "financial products and services that have predatory, unfair, or deceptive features or that pose undue risk to consumer protection."
While not discussed in the supplement, it appears that a Fintech company holding an SPNB charter would be required to be a member of the Federal Reserve System and be subject to oversight as a member bank. As a Federal Reserve member, an SPNB would have access to the Federal Reserve discount window and other Federal Reserve services. To become a Federal Reserve member, an SPNB would have to subscribe to the capital stock of the Federal Reserve, a requirement that should not be particularly burdensome. However, since Federal Reserve membership would make the affiliate transaction restrictions of Sections 23A and 23B of the Federal Reserve Act applicable to the SPNB, a Fintech company interested in obtaining an SPNB charter should consider the potential impact of these restrictions.
The OCC’s decision to begin accepting SPNB charter applications from nondepository Fintech companies is consistent with the views of the Treasury Department set forth in its report, "Nonbank Financials, Fintech, and Innovation," which was issued the same day as the OCC’s announcement. In the report, the Treasury Department endorsed the OCC’s proposal to grant the charters and recommended that it finalize the proposal.
The OCC’s decision to begin accepting applications, however, is likely to be challenged by state regulators who have opposed the proposal. Lawsuits challenging the OCC’s authority to grant SPNB charters to nondepository Fintech companies filed by the Conference of State Bank Supervisors (CSBS) and the New York Department of Financial Services (DFS) were dismissed for lack of standing and ripeness by federal district courts in D.C. and New York respectively. Indeed, the DFS Superintendent released a statement on the day of the OCC’s announcement in which she stated that the OCC’s decision to begin accepting the charter applications was "wrongly supported by the Treasury Department" and "is clearly not authorized under the [NBA]." In addition, according to media reports, the OCC’s decision has also been criticized by the CSBS President.
It is unclear whether, based on the decisions dismissing the two lawsuits, the OCC’s announcement that it will begin accepting applications would be sufficient to allow state regulators to file new lawsuits that would survive a motion to dismiss for lack of standing and ripeness or whether the OCC would first have to approve an application. In its opinion dismissing the DFS complaint, the court noted that the DFS had sent it a letter asking it to require the OCC to promptly notify the DFS "if and when" the OCC decided to accept SPNB charter applications and allow the DFS to reinstate the case and litigate its challenge before an application is approved. The court indicated that it did not have the subject matter jurisdiction necessary to grant the relief requested but indicated that it would be "sensible" for the OCC to provide such notice.
Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products and programs, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.
The firm's Marketplace Lending Task Force is nationally recognized for counseling marketplace lending businesses in both the consumer and small business spaces. We offer soup-to-nuts guidance, working with startup alternative lenders, long-established market leaders, banks, institutional investors, and others. We document and advise on the structure and strategy of bank, platform, and investor relationships, assist in concluding account servicing arrangements, provide extensive consumer regulatory advice, documentation, and diligence assistance, and help with state licensing. We have been advising clients on the steps involved in obtaining an SPNB charter.
On July 31, 2018, the day that the National Flood Insurance Program was set to expire, the U.S. Senate voted 86 to 12 to reauthorize the program through November 30, 2018. The action follows an earlier reauthorization of the program through the same date by a 336 to 52 vote in the U. S. House of Representatives. President Trump signed the reauthorization, which simply kicks the can down the road to just after the mid-term elections, and falls far short of the more permanent resolution to the flood insurance program sought by the mortgage industry.
Yesterday, the three bills described below were passed by the House Financial Services Committee. The first two bills were passed by unanimous votes and the third bill was passed by a vote of 34-22.
- The "Bank Service Company Examination Coordination Act of 2017," (H.R. 3626), which amends the Bank Service Company Act (BSCA) to enhance the ability of state and federal regulators to coordinate examinations and share information about third-party service providers to banks. The BSCA authorizes a federal banking agency to supervise and regulate the activities of a bank service company with a "principal investor" supervised by the agency and, where a federal banking agency supervises a bank service company’s "principal shareholder or principal member," to authorize any other federal banking agency that supervises any other shareholder or member of the bank service company to examine the bank service company. In addition, the BSCA authorizes a federal banking agency to supervise and regulate the activities of third-party service providers to a bank it supervises and to initiate enforcement actions against both the bank and its service provider for violations of law, including violations of Section 5 of the FTC Act which prohibits unfair or deceptive acts or practices. The bill would amend the BSCA to:
- authorize a state banking agency with supervisory authority over a bank service company’s principal investor to supervise and regulate the activities of the bank service company to the same extent as it can supervise and regulate the principal investor;
- authorize a federal banking agency with supervisory authority over a bank service company’s principal shareholder or principal member to authorize a state banking agency that supervises any other shareholder or member of the service company to examine the bank service company;
- when a state bank is a shareholder or member of a bank service company, require the federal banking agency authorized by the BSCA to supervise the bank service company to "provide reasonable and timely notice to, and consult with" the state banking agency with supervisory authority over the state bank and "to the fullest extent possible, coordinate and avoid duplication of examination activities, reporting requirements, and requests for information;"
- authorize a state banking agency with supervisory authority over a bank to supervise and regulate the activities of third-party service providers to the bank to the same extent as if such activities were performed by the bank itself; and
- allow information obtained "pursuant to the regulation and supervision of service providers under [the BSCA] or applicable State law [to] be furnished by and accessible to Federal and State agencies to the same extent that supervisory information concerning depository institutions is authorized to be furnished to and required to be accessible by Federal and State agencies under [the FDIC Act] or State law, as applicable."
- The "Financial Technology Protection Act," (H.R. 5036), would create an "Independent Financial Technology Task Force" to "conduct independent research on terrorist and illicit use of new financial technologies, including digital currencies" and "develop legislative and regulatory proposals to improve counter-terrorist and counter-illicit financing activities." The bill designates the Secretary of the Treasury as the head of the task force. In addition to the Attorney General and other government officials, the members of the task force include "six individuals appointed by the Secretary of the Treasury to represent the private sector (including the banking industry, nonprofit groups, and think tanks), with at least one of such individuals having experience in the Fintech industry." The bill would also establish a "FinTech Leadership in Innovation Program" to be funded through fines paid by individuals convicted of having been involved with "terrorist use of digital currencies." The bill would authorize the Secretary of the Treasury to make grants "for the development of tools and programs to detect terrorist and illicit use of digital currencies."
- The "Mortgage Fairness Act of 2017" (H.R. 2570), would amend the Truth in Lending Act to provide that the direct or indirect compensation paid by a consumer or creditor to a mortgage originator that is part of "points and fees" does not include "compensation taken into account in setting the interest rate and for which there is no separate charge to the consumer." It appears that the bill is intended to address situations in which a creditor charges a premium interest rate that the creditor will use to pay compensation to the mortgage originator.
On July 30, 2018, an updated version of the NMLS Policy Guidebook was posted to the NMLS Resource Center. The announcement posted on the Resource Center home page states that "The updated NMLS Policy Guidebook does not introduce any new or different policies than those already adopted," but clearly there are changes or there would not be a need to publish an update. Our understanding is that the changes (whatever they are) were not shared with or discussed with state regulators or with industry representatives in advance of publication. The issue also was not addressed during the NMLS Ombudsman meeting on July 31, which was held in conjunction with the American Association of Residential Mortgage Regulators' (AARMR) Annual Regulatory Conference. We will provide further updates once we have been able to determine what has changed.
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